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Joining us now the one that puts Greek and Latin into our bond coverage. Robert Michael, Bobmichael of JP Morgan. How do the Greeks right now? The derivative Greeks play into what you do When you look at the quiet of holes in the market or renew volatility, maybe it's skew that you play into. How does a derivative space fit in?
They're critical to what we do in the markets. I think so much of what you try to do is in the cash market, but there's limited bandwidth. Broker Dealer balance sheets aren't what they used to be, and a lot of the balance sheet in the industry sits with investors like ourselves, and we tend to own securities until we change our mind. So we're not in the market
actively trying to change positions. You go in to the derivatives market to help you change the positioning of your portfolio or perhaps put a bit of a hedge on.
Is there a a bot Michael and I think of Ian Lingotn at BMO Capital. You're saying we're going to see price up, yield down. Is there a bet in the space. Now like what you believe that we will see as a regime lower.
Yields, Well, it's everywhere. We liken the current environment to nineteen ninety five. There's one critical difference. When the FED finished hiking rates from three percent to six percent in ninety five, the entire yeld curve was above the FED funds rate. Today, we think the Fed is done hiking rates, but the entire yeal curve is trading roughly one hundred
basis points through the FED funds rate. So that's telling us that the market still believes that the Fed will come in take pressure off of businesses and households by doing at least a few rate cuts over the next twelve months.
Bob, we're sitting here at the two year treasury almost at five percent. Here, I don't know. I'm gonna park my money right there, and I'm gonna feel fine. Is that a bad trade?
It's not a bad trade, but you may feel lonely compared to the money that's sitting in money market funds. You're willing to step out. But what we're looking at is over six trillion dollars of assets sitting in money market funds. YEP and they're feeling cozier at somewhere closer
to a five and a half percent yield. For that money to come out and come into the bond market, we do need to see the Fed begin to cut rates, or at least telegraph that they're thinking about it again and not dropping these sins that maybe rates could go higher.
So what do you think our Fed should do? I mean, the economic data suggests that maybe there's no reason two cut rates. We've got I don't know, inflation still out there.
If I were at the Fed, everything looks so good, I would just sit in my hands for the next couple quarters, see what happens into the election and do nothing. You're looking at over two years of unemployment below four percent. I know we get PCEE at the end of this week. There's a lot of debate. Is it going to be two seven or two point eight year every year? Is it a point two five or a point twenty seven increase?
The reality is to something year every year is much lower than the six point six percent year every year it was a couple of years ago.
A stated system. Is there leverage in the system? Is there that animal? I don't I don't want to say, animal spirit, that that ancient animal instinct to leverage up when we're certain we know what we're doing. Is there that bet right now?
You're not seeing it to the extent that we saw previously, either headed into the dot com bubble in two thousand or certainly into the Great Financial Crisis into one thousand and seven two thousand and eight. But there is a lot of borrowing going on out there. The most leffed balance sheet are not businesses in household they're actually federal
governments globally. When you look about the extension of credit into the system, bank balance sheets may have shrunk, but private credit is out there.
But the heart of the matter, going back to Roguoff and Reinhardt this time is different. Is they took within their iconic study of debt that it's about public and private combination of debt. Would you suggest we're going to see a private debt issuance and build up in belief in debt, so we've got both public and private over indebtedness.
It doesn't feel like we're heading there. I agree. Right right now it feels like and I know you did a story that consumers are looking to do a bit more vacationing and a third of them are willing to put that, willing to go into debt to do that. Going into the financial crisis, one hundred and twenty percent of them would have been willing to have gone into debt to go on vacation. So there is some moderation. You look at housing, consumers aren't changing art chasing housing prices higher.
Let's listen to our Latin tour guide here as we.
Go to Rome Arma where room quay kind of troy I qui primus aboris.
That's great, and that's like Lisa Mateo's schedule to go to Rome Here she's going deep into debt okay and to go to loans so she can catch up with Bob Michael and the Latin.
That's perfect.
It's out there as well. It's going to happen.
Bob.
What do I do here?
And if I want to take some credit risk here, do I stay with investment grade? Do I go to high yield because high yield was the performer last year in the fixed income space. Where do we go in a credit space?
You hope that over the next week high yield pulls back a little bit further, and then you go in without recession on the horizon. You have nothing to fear but yourself. If you stay out of the high yield market, you're picking up now yields of over eight percent. Wow, corporate profitability looks good. It's a much cleaner high yield market than anything in my lifetime. Six percent of it washed away back in twenty twenty.
I guess I got to go to the FED meeting as well. The basic idea is it's a snoozefest to get to June when they redo the dots and as a raging debate now Craig Taurus with great leadership on this over the weekend about the FED almost over communicating. Is your world made more complex because there's too much communication from FED presidents, governors and leaders?
You know, Tom, the one dead language that I miss is FED speak. Remember in the days back in the eighties, when the FED wasn't always tell you every day what you were thinking.
I yearned for it.
You used to get the Fed minutes, You used to get the listen to the Humphrey Hawkins testimony. You heard what Greenspan said, then you got out your secret FED decoder ring and interpretd what he meant and there was a value to that, and I think there is just way too much daily information coming Paul.
The most important conversation I've had on this is someone that Bob Michael knows, Richard Berner, who drove the ship at Morgan Stanley for Steve Roach for years in the US economy, public service to the nation at Treasury. And what was so important here is there was just what mister Michael says. And then you would go see a president at a rotary club or some other economic club and they'd say, just as little at the breakfast is they were saying to us on the street.
Bob, you're head of the global fixed in them Currency and Commodities group. Here, let's go currencies. What is there a bare case for the US dollar here? Or are we just all along the US dollar and letting everybody else deal with it.
There's a bare case for the dollar when the Fed starts cutting rates. Until they do that, there's no sense fighting the strength and the dollar. If you look at when the dollar really started to gain strength, it's when the FED started hiking the FED funds rate at the start of twenty twenty two. Back then yen was about one ten, not one fifty. The entire strength and dollar yen has come from the FED hiking rates, not anything that's happened on the Bank of Japan's part.
So, and we see central banks around the world cutting rates or saying they will cut rates, signaling that they will cut rates. So I mean, does a FED, how does the FED think about the dollar when they think about their rate policy.
You're right, there have been seven thousand basis points of rate cuts in the emerging market central banks. So those central banks have been cutting rates for over a year, and I have to imagine they're starting to second guests whether they need to keep cutting rates. Here. I don't know that the FED thinks about the dollar all that much. If we go back, we were just talking about the FED speak of the nineteen eighties. I remember we used to look at the tanbook, We used to look at
the minutes. We used to see how they prioritized inflation, growth and the dollar, and many times the dollar was their number one priority. I don't think it's their priority right now. I think it's a huge one for the ECB and the Bank of Japan.
ABOB and the time we got left, I really want to focus here on endo. The earning season in corporate issuance off of like v body at Boston University, or there's a thing folks called eminem It's not the candy, but it's a theory here and the allocation of your capital structure to debt. Are we underdebted right now in quality corporate America? Do they have not enough bills, notes and bonds?
I think we are. We have spent the last quarter trying to poke holes in corporate profitability in the markets and at JP Morgan with our credit research team, and they can't do it. And instead what they're seeing is a reacceleration in corporate profitability and businesses thinking about investing in cap X Again, it looks pretty bright out there for corporate America. It does remind me in nineteen ninety five.
Do you suggest bond issuance will be the surprise of the next eighteen months.
I don't know. I think there's a shortage of corporate debt right now. We were looking out over the next couple quarters and there's more money maturing from there are points.
What you just heard there, folks, is classic John Templeton from Bob Michael. I'm sorry, Paul, I'm in this camp. There's a shortage of bonds. Nobody's looking at the Bob Michael world and it's a tangible part of how we do this, and it links into the equity market, and there's just a shortage of bonds. That's all there is.
I mean, Bob, you're JP Morgan asset management. You guys are pretty big. If you wanted to get out of a position change a big allocation. Is there enough liquidity on the street to kind of get that trade done to your liking today versus ten or fifteen years ago. How much harder is it, if at all, to kind of make major trades for you guys.
Right now when things are relatively stable, you can do it. It will take a little bit of time, depending how large a position you're trying to move. There's a lot more in portfolio trading, so hundreds of line items all at once at a single price. That's a feature that didn't exist pre financial crisis. But when everyone is waried and everyone's pulling back liquidity and their balance sheet, then it is far more challenging than it was.
JP Morgan, you say, get that trade done for me, right? I mean, you guys are players.
You try not to do that because you are you are reliant on a counterparty. I think that's a pre financial crisis, is that right?
Let me pin down the tenure yield twelve months from now, just a vanilla media call here for animals like me.
I think we're going to be right around four percent.
Down, but not down with the drama that financial meautia.
Not a whole lot, not a whole lot. I think the FED could probably get one hundred and one hundred and twenty five basis points of great cut.
So are you doing cliff notes now in FED speak? If you've got Greek and Latin down from your undergraduate days.
I don't. Are you looking at FED speakers, I don't need to do it. They're telling us every ten minutes what they're thinking. You don't need cliff now.
Bob Michael, thank you so much. Just generous with his time here on a Monday. That morning, he of course, is with JP Morgan